SEOUL, Jan 16 (Reuters) - North Korea demanded that South Korea and the United States halt annual military drills due in February and March, saying they were a direct provocation, a statement that suggested a re-run of a sharp escalation in tension last year.

But in a bizarre twist, it also offered a Lunar New Year truce in hostilities, provocations and mutual criticism.

In 2013, North Korea said it would retaliate against any hostile moves by striking at the United States, Japan and South Korea, triggering a military buildup on the Korean peninsula and months of fiery rhetoric.

The reclusive North has regularly denounced annual drills such as "Key Resolve" and "Ulchi-Freedom-Guardian" staged by South Korea and United States as a prelude to invasion.

"We sternly warn the U.S. and the South Korean authorities to stop the dangerous military exercises which may push the situation on the peninsula and the north-south ties to a catastrophe," the North's KCNA state news quoted a body in charge of efforts to promote Korean unification as saying.

Similar bellicose rhetoric from the North set South Korea, the United States and Japan on edge a year ago. As a result, Washington flew Stealth bomber missions over South Korea and strengthened its military presence in the South, where nearly 30,000 U.S. troops are based.

South Korea said the drills were going ahead as planned and despite the threat, North Korea's military has showed no sign of unusual activities.

"If North Korea actually commits military aggression at the excuse of what is a normal exercise we conduct as preparation for emergency, our military will mercilessly and decisively punish them," Defence Ministry spokesman Kim Min-seok said.

Later, North Korea appeared more conciliatory.

"We propose formally to the authorities of the South that on the occasion of the Lunar New Year holiday beginning on Jan. 30, both sides take substantive steps of halting actions that provoke and criticise the other," the National Defence Commission, headed by North Korean leader Kim Jong Un, said, according to the KCNA news agency.

"We propose substantive steps that halt all military hostile actions against the other," the commission said, adding they should include the halt of the annual military drills.

North and South Korea remain technically at war after their 1950-53 civil conflict ended in a truce, not a treaty.

China, North Korea's only remaining real ally and which has been alarmed by what it sees as provocations by both sides, called for restraint.

Analysts say the North cannot risk igniting a conventional military conflict it would almost certainly lose.

Many North Korea watchers believe the isolated country could instead launch another long-range rocket or push ahead with a nuclear test. It has conducted three nuclear tests, the last one in February last year.

The North could also stage another artillery attack on South Korean territory as it did in 2010, and risk provoking a military response from Seoul that could trigger a wider conflict.

The North's rocket launches are banned under United Nations resolutions because they are viewed as part of a process of proving the technology for an intercontinental nuclear weapon. Its nuclear programme has also been sanctioned.

North Korean leader Kim Jong Un, who took power two years ago, has pursued his father's military policies, including those aimed at obtaining nuclear strike capacity. (Additional reporting by Ben Blanchard in BEIJING; Editing by Nick Macfie)